FINfacts Newsletter XVII-15

Hot Money 06/09/2009  - Large Commercial Bank Providing Excellent Pricing on High Quality Commercial Real Estate Assets. Relationship lender is currently providing excellent financing terms for high quality commercial real estate properties. This balance sheet lender will finance all major asset classes in large metropolitan areas nationwide. The current pricing is a spread over LIBOR with no floor (typically swapped to a fixed rate). Rates are currently pricing in the LIBOR + 3.50 -4.50%. Leverage of up to 65% LTV.  This lender is currently focused on originating larger loans ($10M and up) for institutional quality sponsorship and assets. Partial recourse is available on deal-by-deal basis.

Hot Money 06/03/2009 - Bank Providing Unique Program for Community Associations (aka HOAs). GSP has identified a unique lending program focused on providing financing to community associations nationwide. The program provides financing for the following: (1) Any common area repair or upgrade. (2) Purchase of real estate to be held by the association. (3) Purchase of land leases. (4) Equipment purchases. The program can provide up to 100% of capital improvement budgets and uses an assignment of common charges or assessments as collateral for loan (no personal guarantees or liens on individual units necessary). Loan terms up to 15 years; all loans are fully amortized. 

With trillions of dollars of commercial mortgage maturities occurring over the next several years and a frozen credit market to boot, the US Government addressed this ever-growing concern with the announcement of yet another government sponsored program designed to ease the flow of credit to consumers by providing an outlet for lending institutions to unload their bad assets. Unveiled by the Treasury in March, the Public Private Investment Program (“PPIP”) was created to enlist the help of private investors, by encouraging them to purchase distressed debt (legacy assets) with attractive financing provided by the Federal government. Using $100 billion in TARP capital and capital from private investors, the program intends to generate $500 billion to $1 trillion in purchasing power to buy legacy assets currently hampering the balance sheets of U.S. lending institutions. Although highly touted initially, recent developments in the market have brought into question the efficacy of the PPIP. This piece will examine some of these developments and their effect on the government program.

The first sign of trouble for the PPIP was the announcement by the Financial Accounting Standards Board (FASB) of the easing of mark-to-market accounting rules. Mark-to-market accounting was a major concern for many lending institutions holding distressed assets, afraid of eminent write-downs and loses. The easing of mark-to-market will likely discourage lending institutions from auctioning their distressed assets at heavily discounted prices, opting instead to hold them on their books for prolonged period of time in the hope of a recovery.

Further hampering the government sponsored program is the recent announcement by Standard & Poor’s that it may downgrade many AAA rated asset-backed securities, rendering them ineligible under the central bank’s rules (currently only AAA securities are eligible for purchase under PPIP). That said, as much as 90% of so-called super senior commercial mortgage bonds sold in 2007 may be affected if the ratings change.

Additionally, since PPIP was announced, U.S. banks have raised a substantial amount of capital through stock sales and by converting preferred shares. Although difficult to calculate, it is estimated that banks have raised over $100 billion in capital since the PPIP announcement in March. The banks’ ability to raise capital efficiently without having to sell distressed assets reflects renewed investor confidence in the banking system. This development is also likely to impede the PPIP’s ability to garner interest from lending institutions.

All said, it is still too early to determine if PPIP will fail to meet its initial objectives. Some observers have noted that PPIP was probably only intended to freeze the capital markets until external events unfolded to renew confidence in the capital markets. At the end of the day, lending institutions’ balance sheets are still hampered by distressed assets. A feasible and palatable solution to selling distressed assets is necessary, whether or not PPIP is the vehicle is yet to be seen. (Sean Lurry)

GSP is pleased to announce that we have established a relationship with a well recognized residential mortgage lender providing a full range of residential mortgage products. A lender representative is located in our offices. Please contact Todd August or your GSP representative if you need assistance with your residential mortgage.